Average True Range (ATR)

Average True Range (ATR) is the average size of a bar's range, including gaps, in the asset's own price units. It measures how much the price typically moves per bar.

How Average True Range is calculated

True range = the largest of: high - low, |high - previous close|, |low - previous close|. ATR is a smoothed average of true range, usually Wilder's smoothing over 14 bars. An ATR of 2.00 on a 100.00 stock means a typical bar spans about 2 dollars.

How it is read

ATR does not give direction. Traders use it to set a stop distance (for example 2 x ATR from entry) and to size a position so that the stop costs the same dollar amount on calm and wild days.

Common mistakes

• Comparing ATR between assets in price units. Divide by price (ATR %) first.
• Setting a stop inside one ATR and being stopped by ordinary noise.
• Using the ATR of a calm period to size a position going into an announcement.

Test it yourself

• Test it in the Backtest Lab

Pick ATR as an operand with a length (the Lab reads the high, low and close itself) and compare it with a constant or another indicator. The Lab charges trading costs on every trade, fills on the next day's open, and shows how many attempts you have made.

What Tickfloor tested

Tickfloor has not published a backtest of a rule built only on Average True Range. It describes or manages something rather than giving a signal, so there is no strategy to score. It still shapes how any tested rule should be read.

Lessons that cover it

• ATR, Bollinger Bands and volatility-based stops

• Short definition in the glossary

Related concepts

• Volatility
• Stop loss
• Position sizing
• Bollinger Bands
• All concepts

General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.

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